key term - National debt

Definition

National debt is the total amount of money that a country's government has borrowed and owes to creditors. It accumulates over time as governments run budget deficits, where spending exceeds revenue, leading to the issuance of bonds and other financial instruments to cover the shortfall.

5 Must Know Facts For Your Next Test

1. National debt is often expressed as a percentage of a country's Gross Domestic Product (GDP), indicating the scale of debt relative to the economy's size.
2. The national debt can be divided into two categories: external debt, which is owed to foreign creditors, and internal debt, which is owed to domestic entities.
3. Governments may issue treasury securities to finance their national debt, with interest payments required on these securities affecting future budgets.
4. Rising national debt can lead to concerns about sustainability and potential default, prompting discussions about fiscal policies and budgetary reforms.
5. Interest payments on the national debt can consume a significant portion of government revenue, impacting funding for public services and infrastructure.

Review Questions

• How does national debt relate to budget deficits and what implications does this relationship have for government fiscal policy?
  • National debt is directly tied to budget deficits since ongoing deficits require governments to borrow money, leading to an accumulation of debt. When spending consistently exceeds revenue, it forces policymakers to make difficult choices regarding future budgets. They must balance the need for public services with the obligation to manage or reduce national debt, impacting fiscal policy decisions significantly.
• Discuss the potential economic impacts of rising national debt on future generations and government borrowing capacity.
  • Rising national debt can impose burdens on future generations by necessitating higher taxes or reduced government spending to service the debt. As the national debt grows, it could limit the government's borrowing capacity, making it more difficult to fund essential services and investments. This situation may lead to slower economic growth and reduced public investment in areas like education and infrastructure.
• Evaluate how different economic theories interpret the implications of national debt on overall economic stability and growth.
  • Different economic theories provide varying perspectives on national debt's implications for stability and growth. Keynesian economists may argue that increased government borrowing can stimulate economic growth during downturns by funding public projects and creating jobs. In contrast, classical economists often view high national debt as a risk factor that could lead to inflation or crowding out private investment. The balance between these views affects policymakers' approaches to managing national debt in pursuit of sustainable economic growth.

Related terms

budget deficit:

A budget deficit occurs when a government's expenditures surpass its revenues in a given fiscal period, prompting the need to borrow money.

bond: A bond is a fixed income instrument that represents a loan made by an investor to a borrower, typically used by governments to raise funds for various expenditures.

public finance: Public finance refers to the study of how governments manage their revenue, expenditures, and debt, as well as the impact of these activities on the economy.